How to Make Cost-Allocation Decisions for Your Nonprofit

Cost allocation may not be the most exciting part of running a nonprofit, but it’s one of the most important. Whether you're managing multiple programs or preparing your financial statements, how you allocate costs affects transparency, compliance, and donor trust.

Donors, grantmakers, and watchdog groups all want to know how you use your funds—and the Financial Accounting Standards Board (FASB) requires you to follow clear rules. Here’s what nonprofit leaders need to know about cost allocation and how to stay compliant with FASB and Generally Accepted Accounting Principles (GAAP).

Why Cost Allocation Matters for Nonprofits

Properly allocating costs helps your nonprofit:

• Comply with FASB and GAAP standards

• Accurately report program vs. overhead expenses

• Build trust with donors and grantmakers

• Make better financial and strategic decisions

FASB requires all nonprofits to report expenses by nature (what was purchased, such as salaries or rent) and by function (why it was purchased, such as program services or administration). This information must appear in one place—either in the financial statements, the notes, or as a separate statement of functional expenses.

Functional Expense Categories for Nonprofits

Nonprofit expenses must be categorized into two main groups:

• Program services: Activities that directly fulfill your organization’s mission.

• Supporting activities: Necessary expenses that keep the organization running, divided into three subcategories.

1. Management and General

These expenses are essential to operating your nonprofit but aren’t tied to a specific program. Examples include:

• Budgeting and finance

• Human resources

• Governance and oversight

• Office administration

Avoid using this category as a “catchall.” For example, building costs like mortgage interest should be allocated to programs or other supporting functions if appropriate. Over-allocating to management can misrepresent your nonprofit’s impact.

2. Fundraising

Fundraising includes any activities aimed at securing donations, such as:

• Campaign planning

• Direct mail appeals

• Special events

• Donor relations

Sometimes, fundraising overlaps with other functions—like educational messaging in a mailer. If your activity meets FASB’s criteria for purpose, audience, and content, you can allocate expenses between fundraising and the other function. Otherwise, you must report all costs as fundraising.

3. Membership Development

This applies to nonprofits with members and includes:

• Recruitment

• Collecting dues

• Managing member engagement

If the benefits or responsibilities of membership are significant, FASB requires you to report these costs separately.

Choosing a Cost Allocation Method

FASB requires nonprofits to disclose their expense allocation methodology. This can include:

• Time studies

• Square footage use

• Direct allocation

• Full-time equivalent (FTE) distribution

Whatever method you use, it must be consistent and well-documented—guessing is not allowed.

Simplify Cost Allocation with Expert Support

Accurate cost allocation doesn’t just improve compliance—it enhances transparency, strengthens donor confidence, and supports smarter decision-making. Because the process can be complex, it’s smart to partner with nonprofit accounting experts who can help you create and maintain a strong cost-allocation plan.

Need help simplifying your nonprofit’s cost allocation process?
Contact us today to get started with a strategy that supports your mission and meets FASB requirements.